Derivatives

Presented by: Aditya Ahluwalia www.finstructor.in

Forward Contracts
Definition Stock Example T-bill Example Physical delivery Cash Settlement Termination Prior to Expiration End user vs Dealer

Eurodollar deposit, LIBOR, Euribor

Forward Rate Agreement

Futures

Termination of a Futures Contract Delivery Cash Settlement Offsetting Trade Exchange for physicals

T-Bill Futures
Notional 1 million Underlying 90 day T-bill Price quote (100 annualized discount in %) Question A price quote of 98.52 represents what delivery price

Eurodollar Futures
Notional 1 million Underlying 90 day Libor Price Quote 100 annualized 90 day LIBOR Price Quote of 97.60 corresponds to what yield

One tick = Price change of 0.01%, representing 25$ per $1 million contract

Treasury Bond Futures Contracts

Stock Index Futures

Option markets & contracts

 American Options European Options

Moneyness

 Exchange traded options Over the counter options

 Bond Options Index Options

Options on Futures Call Options (enter as a long) Put Option (enter as a short)
Commodity Options

 Interest Rate Calls Interest Rate Puts

Long interest rate call + short interest rate put = Long FRA

CAPS (Combination of Caplets)

FLOORS (Combination of Floorlets)

COLLAR

Intrinsic Value & Time Value

Terminology

PUT CALL PARITY

Synthetic Options
Synthetic Options

 Call prices are inversely related to exercise prices Put prices are directly related to exercise price

Early Exercise
American Call Options on dividend paying stocks should never be exercised early

Asset with Cash Flows

Reduce S by the present value of the cash flows

Impact of Interest Rate & Volatility Impact of Interest Rates Impact of Volatility

SWAP MARKETS & CONTRACTS

Swap Basics
Interest Rate Swaps Currency Swaps

CURRENCY SWAPS

Interest Rate Swap